9 Reasons to Follow the Insiders into South Korea

Philadelphia Phillies manager Charlie Manuel once said, “Winning is hard – way harder than people think it is.”

While he was obviously referring to baseball, seasoned investors can certainly relate to it. That’s why we’re constantly seeking new strategies to eke out an advantage in the markets.

Many strategies are too complex, while others border on insane. They promise slim margins, but require so much risk, they’re akin to standing in front of a freight train to pick up pennies. No, thanks!

But there’s one notable exception – one of the most profitable, proven and simple ways to get a leg up in the markets.

It’s by investing alongside corporate insiders. I mean who else knows about a company’s business and future prospects better than the guys running the show?

Right now, insider buying activity in one country is sending us a clear signal: It’s time to buy…

Buy High, Sell Higher?

South Korea’s Kospi Index keeps hitting new all-time highs this year.

Investors seem to have adjusted the old ‘buy low, sell high’ adage and are following a ‘buy high, sell higher’ motto instead. And corporate insiders are leading the way.

The latest Bloomberg data confirms that insiders at the top 100 South Korean companies made at least 255 stock purchases during the first quarter, outpacing sales by almost 35%.

The last time we witnessed so much insider buying in South Korea was during the first quarter of 2009. After which the Kospi went on a tear, rising 40% over the next six months.

Back then, of course, we were coming out of a global recession. So we can’t expect a repeat performance. Nevertheless, the lopsided buying activity is definitely a reason to be optimistic about the prospects for South Korean stocks.

By comparison, U.S. insiders aren’t nearly as bullish. Executives at S&P 500 companies have actually been selling way more shares than they’re buying. According to Bloomberg data, insider buying trailed insider selling by 91% in the first quarter.

Of course, insider-buying trends shouldn’t be the only basis for a stock purchase decision. And when it comes to South Korea, there are plenty more reasons to be positive…

Nine Reasons to Be Bullish On South Korea

~ Solid GDP Growth: South Korea’s economy grew by 4.2% during the first quarter. And for the full year, economists expect the economy to grow by 4.5%, thereby providing a favorable tailwind for all businesses.

~ Crisis in Japan… Opportunity in South Korea: The tragedy in Japan is impacting supply chains across the world. That’s boosting demand for products from South Korean competitors in the semiconductor and chemical space, to name a few. At the same time, South Korean companies like steel producer, POSCO (NYSE: PKX) are being recruited to help with the massive reconstruction efforts.

~ Cheap Won = More Exports: South Korea’s currency remains 20% below its pre-financial crisis levels, making its products extremely attractive to foreign buyers. Exports reached a record level in 2010 and the trend is continuing, as exports hit records every month in 2011 so far.

~ Cheap Stocks: Despite the impressive run, South Korean stocks are about 20% cheaper than U.S. stocks. On average, they trade for 13.1 times trailing earnings and 10.8 times forward earnings. So insiders are actually buying stocks low!

~ China: We all know that China’s economy continues to blaze ahead. But the country’s growth is also stirring up demand in South Korea, as its companies supply China with “raw materials” – from steel for automaking, to semiconductors for high-end electronics.

~ No Sovereign Debt Concerns: While the United States and much of Europe tries to avert a debt crisis, no such risk exists to undermine South Korean stocks. Public spending only accounts for about 25% of GDP and the country actually boasts a current account surplus.

~ Promotion, Please: Last June, when MSCI announced the countries for reclassification, South Korea narrowly missed getting promoted from ’emerging market’ status to ‘developed.’

This June, it could get the nod. If so, we can expect more investment capital to flow into the country, further boosting equity prices.

~ Lower Correlation with U.S. Stocks: The latest research from Standard & Poor’s reveals that South Korean stocks sport a correlation with the S&P 500 below 52%. That means if U.S. stocks drop by 30%, South Korean stocks should only fall about half as much.

By comparison, China sports a correlation of 67%, while Europe, Latin America and Canada check in with correlations north of 78% with U.S. stocks. In short, South Korean stocks provide diversification.

~ Buffett Knows Best: Although his image might be tarnished in the aftermath of the Lubrizol Corp. (NYSE: LZ) buyout, Warren Buffett still knows how to sniff out opportunities.

South Korea was a key stop on his Asia tour in March. If he’s looking for deals in the country, as he told reporters, so should we.

The Easiest (and Safest) Path to Profits in South Korea

The only drawback I see to investing in South Korea is that very few companies trade on the major U.S. exchanges. According to the database at The Bank of NY Mellon, there are only nine!

That’s why I think the iShares MSCI South Korea ETF (NYSE: EWY) is the best option. The ETF provides exposure to 105 actively traded South Korean stocks. And at a reasonable price, too. The ETF charges an expense ratio of just 0.61%.

Granted, investing in so many stocks at a time can mute the upside potential. But it also limits the downside risk, which is never a bad thing.

In the end, as one South Korean company said to Bloomberg, “Stock purchases by executives, which were voluntary… show their confidence in the company’s future.” A long list of fundamentals only confirms that the outlook for South Korean stocks is bright indeed.

So in this case, maybe winning isn’t that hard after all. Just follow the insiders.

Ahead of the tape,

Louis Basenese

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